Countries Tend to Be Too Optimistic About Their Budget Forecasts

Budget forecasting may be an imperfect art prone to lots of error, but when researchers looked at how forecasts and reality measured up, the errors ran mostly in one direction. Jeffrey A. Frankel and Jesse Schreger from the National Bureau of Economic Research looked at the one-year projections for the deficit or surplus in the government budget for 17 Eurpoean countries from 1999 and 2008 (so, setting aside the volatile years since the financial crisis) and then compared them to what actually happened. To compare countries, they put the error as a percentage of GDP.

As you can see, all but four of the 17 nations were too optimistic about their national budgets. The seven most optimistic countries include a who's who of the European debt crisis: Greece, Ireland, Portugal, Spain, and Italy all were among the most optimistic. But Switzerland and Germany, both of whom have strong currencies, also tended towards rosy predictions.